Stock Market | The Quill

This is Part Two of a series completed for Solutions Showcase. To read Part One, please click here.

Through the volatility of the stock market and the difficulty of picking stocks, Equity Analyst Simon Paterson of T. Rowe Price has thrived throughout his career in giving stock advice. An 18-year career at Brown Advisory and M&T Bank has helped him learn about market trends and helpful tendencies. His role includes providing advice to portfolio managers within his company: “As an analyst, I say, ‘Hey, you should buy or sell this stock.” Then, the managers use that advice to purchase or sell their fund’s holdings.

Simon Paterson, CFA, Equity Analyst at T. Rowe Price

Every analyst within a company covers a market sector, ranging from technology to energy. Mr. Paterson covers the “multi-industrials or companies that have businesses across different types of end-markets.” Across the defense industry, he covers companies such as Booz Allen Hamilton, General Dynamics, and L3 Harris. Meanwhile, companies in the multi-industrial industry include Roper Technologies and Teledyne. He covers “everything from transportation, construction software, and things like that.”

When covering companies and tracking their stock market activity, a large portion comes with reading news articles and press releases. He and his colleagues read “everything we can get our hands on.” Services dedicated to stock market activity such as Bloomberg and CNBC serve analysts well, according to Mr. Paterson. However, trade magazines, company filings, disclosures, and especially conversations with insiders serve them well. He mentioned that he speaks to people dealing with investor relations and listens to their advice on the company guidance. I asked him to rank the three sources of information for market advice: news, numbers, or charts.

While explaining the significance of all three, he chose charts as the most paramount: “What’s important is forecasting, so we spend a lot of time figuring out what the numbers were and why they were, so we can figure out what really matters in driving the numbers in the future.” Though they play a significant role, the other two do not hold the edge against charts. With numbers, “The whole name of the game: we are trying to figure out what’s something worth, and how much cash flow they will generate in the future.” On the other hand, with news, “I think finding out what’s actually happening is most important; there’s a tendency to have a narrative and look for things that support it.”

“What’s important is forecasting, so we spend a lot of time figuring out what the numbers were and why they were, so we can figure out what really matters in driving the numbers in the future.”
Mr. Simon Paterson, Equity Analyst at T. Rowe Price

News and charts are pretty simple to explain when researching stock trends. However, business websites provide large amounts of numbers to investigate. My first article mentioned four numbers that investors use: PE Ratio, PB Ratio, Free Cash Flow, and PEG Ratio. Mr. Paterson explained that the Free Cash Flow metric is the best out of the four because “that’s what they [a company] has earned.” Instead of the quarterly earnings that companies send out, which “are an accounting construct, so there are some non-cash factors in there, free cash flow is the true cash measure of what a company earned.” Usually, significant changes in share prices occur after a company sends out earnings results.

According to Mr. Paterson, a stock begins a positive or negative change in the margin begins the same trend in a company share price. Also, he mentioned, “Most stocks go up when the market goes up, and down when the market goes down. A company typically needs to grow faster than the benchmark, sometimes will do worse if it slows down.” If analysts expect a company to improve by 20%, but they only grow by 10%, investors consider that as slow growth. However, if they outperform that expectation, it is believed that they performed well in the previous quarter. The earnings significantly affect stock price due to “either the earnings numbers or what they say on the call about guidance or sales.”

Through the volatility and unpredictability of today’s stock market, different market sectors fit our world’s positive and adverse events. Infrastructure and capital spending (new federal infrastructure bill), defense (Russian-Ukraine war), cloud technology, and the travel industry (recovery after the pandemic) are some of the best sectors to invest in, according to Mr. Paterson. On the other hand, transportation and retail goods (government not sending money relief) sit on the negative side of today’s world. Through the economy’s difficulties, he admitted that people are worried about a recession due to the high inflation and the rate increases by the Federal Reserve.

For young investors in middle school and high school, Mr. Paterson had some suggestions to start: “Read. Find some good books, and recognize that I’ve been doing this for over 20 years, and I’m still learning all the time. It’s maybe like an athlete, but the good news is our brains can get stronger even as we get older.” Also, he mentioned compound investing: “The most powerful thing in investing is the power of compounding. Any dollar you put in today is going to be worth a lot more when you are fifty or sixty.” When speaking about conversations with experienced investors, humility plays a prominent role in the stock market: “Be humble. People love to talk about their winners, and they never mention their losers. You should have some humility and make sure you are learning from your mistakes. Your expectation shouldn’t be that you are going to get rich quick, and if it is, you are going to do things that will increase the likelihood of you losing everything.”

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As I mentioned earlier, money problems and scandals will plague our world, changing company confidence and negatively impacting investors. The trick about the stock market is managing these issues to bring in the most considerable profit. Mr. Paterson’s advice and expertise have grown since his early days as an investor, and his experience assisting professional fund managers helped him learn the craft of investing. The stock market will become more challenging to navigate with future complications that we cannot predict. Taking advice from the best will only help improve an investor’s attempt to traverse the market.

Alex Kwas is a freshman member of The Quill.

The stock market can act as a complicated topic for young high school students beginning to learn about finances. As the son of a former Equity Research Analyst, the person who delivers advice about certain stocks to investors, and the current Vice President of Investor Relations, the employee who speaks to investors about the company stock trends – my family introduced me to the market at an early age. In fifth grade, I bought my first stock with loaned money from my grandfather and continue to trade up to this day. Using information from investment websites and knowledge from my family members, I put together five suggestions for those with a new interest in investing.

First, I have seen a recent reactionary trend among young investors where they overreact to the price of the stock. At $199 in June 2018, I purchased five shares of Facebook even though the company was at the height of the Cambridge Analytica scandal. Since I first bought stock, I have held it through the difficulties of the technology market. In 2019, it dropped to below $120 per share due to a low earnings outlook but the long-term holding paid off when it jumped to over $300 per share at the end of 2021. Unless actively trying to make money in the short-term—between a few weeks and a month—long-term investment is worth the wait.

Just look at Amazon, one of the largest companies in the world. From September-December 2018, at an all-time high of $1900 per share and trending upward, the company dropped to around $1300 per share, prompting many people to sell. However, since then, Amazon has not faced a significant decline and now sits close to $3500. Think about the major money made by investors that either bought a stock at the $1300 mark or held onto stock purchases from before. From what I have learned, the market will always rebound and a long-term wait will be worth it.

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Second, do not pick a company to purchase based on the name. Always look at the numbers first instead of saying, “I have heard of Apple, Amazon, and Meta so those seem like solid purchases.” However, small-cap stocks (stocks with smaller values) can be the best to make money. According to Investopedia, four numbers to investigate within a stock are PE Ratio, PB Ratio, Free Cash Flow, and PEG Ratio. The PE Ratio—price to earnings ratio—compares a share price to the per-share earnings. Usually, a lower PE Ratio is better because it shows the price an investor will pay for $1 worth of earnings. The Price-to-Book Ratio compares a company’s market value to its book value. The net value of a company is the net difference between the total assets and total liabilities. Similar to the PE Ratio, if a PB Ratio is low, that usually means the stock presents a good opportunity because the market undervalues the company’s worth. Free Cash Flow, a substantial number that indicates a stock’s performance, is calculated by subtracting the cash outflows supporting a company’s operations from the total amount generated. Obviously, make sure to look for a high number because it is the amount of money a company can invest and distribute to shareholders without roadblocks. Finally, to calculate the PEG Ratio, companies take their PE Ratio (the one discussed earlier) and divide it by the growth rate from their earnings. Depending on the company outlook, a higher number could show that they have growth potential but could also scream overvalue. Always be careful when analyzing the numbers and look at a chart if unsure.

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Third, always look to the outside world, scouting advertisements and listening to conversations. Whether watching television, browsing the internet, or taking a drive, new advertisements can begin a frenzy. Just last week, I noticed an advertisement for Newsy, a service that relaunched in October 2021 that provides unbiased news headlines. Their owner, E. W. Scripps (SSP), has had a positive gain of 15% since that release. For a company that has fallen 20% in the past five years, that represents a positive trend in their business. YouTube, Facebook, Twitter, and Instagram act as the most popular space for advertisements, and viewers should pay attention to the public companies for investment opportunities. Also, listening to conversations between people about popular products or new companies on the market can present another opportunity for investment. Tencent Holdings, the owner of Epic Games, has risen over 50% since the release of Fortnite on July 21, 2017, which presents another example of a hot product leading to a higher stock price. Young people talked about this game often and the purchases of materials for the game made the company boatloads of money.

Similar to my first suggestion, if you are not invested in the stock and its share price takes a massive fall, always think about purchasing a part of that company. Unless associated with a possibility of bankruptcy, which is an extremely rare occasion among large companies, expect a large rebound higher than previous prices. Big money comes from these types of examples because if a company lowers its guidance for future quarters but beats those numbers, investors will come in with big money. Obviously, purchasing stock at a medium price brings colossal gains, but buying at an even lower price helps professional investors make their first millions. Before my purchase of Marathon Petroleum in July 2020, it had dropped to below $20 a share, one of the lowest points in its history. However, I chose to wait to see if a rebound was in store for the company and officially bought it at $38. Though it seems like a minimal difference, I could have made an extra two hundred dollars off that stock if I purchased it in March. That difference makes the difference between amateur and professional investors!

Finally, always follow company news and listen to conference calls for stocks you are currently in and stocks you are thinking about purchasing. Especially listen to the guidance numbers that the executive officers provide and how they answer questions from investors. Sometimes it can be hard to understand all the information, so try to read articles from reputable financial sources that explain why the stock acts in a certain way after they post the results. Though it may seem unimportant, add the stocks you are interested in purchasing to a watchlist and read the articles associated with them. Apple Stocks is usually a reliable source because they collect articles from all over the world. Going back to my last suggestion, stocks usually drop after bad earnings results or bad guidance so look for drops as a buying opportunity.

As always, the stock market is unpredictable and can make moves that no one sees coming. However, these five suggestions should help make it a little easier to pick stocks and decide when to sell them. For the second part of this two-part series, I will interview Mr. Simon Paterson (CFA), an equity analyst at T. Rowe Price. His professional advice and recommendations should be something to look forward to.